Lets imagine a game with two participants. They have both produced products that will sell on the high street, but they need to bid for shop-rental.<\/p>\n
Company A thinks it will sell $200,000 a day of it’s product (which it manufacturers on demand so there are no fixed costs), if it has the shop. (consider this profit, after costs of sales).<\/p>\n
Company B thinks it will sell $120,000 a day of it’s product (similar in every way, but it is being cautious, maybe its not as good a product, or they lack confidence in it?) in the same shop.<\/p>\n
How much does the shop-keeper earn?<\/p>\n
Methinks he earns $120,000. How much does the product selling company earn? I think he\/she earns $80k. why?<\/p>\n
lets assume perfect information and a free auction. The 2 companies bid against each other for the shop. Company B cannot rationally go above $120k, because then they lose money. They rationally bid $119,999.99. They lose to company A, which bids the $120k, and then has a take-home profit of $80k per day.<\/p>\n
In a different scenario, give the 2 companies estimates of 800k a day vs 120k a day. What happens now? Company A still gets the store for the same price, but makes 680k a day. The shopkeeper still earns the same.<\/p>\n
What can we learn? Many things. Firstly, it is in the shopkeepers interests to have a large number of high earners wanting to rent their space, rather than a single winner. Secondly, if you are the person renting, you want to crush the competition, not just beat them. Selling 20% better than the next guy is NOTHING compared to the leverage of selling 100% better. The difference earned then is not the 80% you expect, but 400%. (assume paying 20% out for the rent, keeping 80% of revenue vs 20%)<\/p>\n
Interesting conclusions, and maybe this explains why big companies make Call of Duty for $100 million, and not 100 1 million dollar games?<\/p>\n
Replace ‘shop’ with web store or search engine ad, and it all becomes very very relevant and very very interesting. If you are an economics \/ biz geek anyway :D Why the title? I’m thinking that if you have that 120k to put down as a vote of confidence in your product, you win. You get the shop, and you earn the money. Note that Company B goes bankrupt with zero sales :D Outbid into extinction. Also known as starbucks approach to independent coffee shops. bah.<\/p>\n
Is my reasoning\/maths wrong? I have been drinking…<\/p>\n","protected":false},"excerpt":{"rendered":"
Lets imagine a game with two participants. They have both produced products that will sell on the high street, but they need to bid for shop-rental. Company A thinks it will sell $200,000 a day of it’s product (which it manufacturers on demand so there are no fixed costs), if it has the shop. (consider<\/p>\n